Clearing House (Futures Market)
The term clearing house refers to an organization that stands between the clearing member of a buyer and seller. Clearing houses maintain the integrity of the market by guaranteeing performance of a contract.
ExplanationBuyers and sellers of financial instruments in the futures market will conduct those trades through a clearing member. Once a buyer and seller are matched, the clearing house will guarantee performance under the contract. In addition, this organization provides a number of services including regulating delivery under the contract, maintaining margins, settling accounts, and clearing trades.
The clearing house improves the efficiency of the market, and removes the risk of non-performance through its guarantee, thereby instilling investor confidence in the process. All regulated futures exchanges have a clearing house, which is responsible for the following:
- Mitigating Risk: providing funds and other financial safeguards to guarantee contract performance while maintaining margin requirements.
- Market Transparency: market participants are provided with settlement prices, calculated using independent methods.
- Delivery: in conjunction with the futures exchange, and depending on the product, the clearing house will facilitate the delivery process between the buyer and seller.